Cheer up.
National Australia Bank
’s
Cameron Clyne
wants to remind everyone the economy is fundamentally strong, the transition from the mining boom is going relatively well and the persistent concern about rising unemployment is constantly proved wrong.

Right on cue, the unemployment rate in April was stable at 5.8 per cent, meaning employment has increased each month this year. Most of the growth was in full-time jobs – despite regular announcements of large scale job losses from various companies.

Clyne does concede that such structural transition can be “noisy" – in part, he jokes, because blacksmiths didn’t use Twitter 100 years ago when they lost their jobs.

Now given this is Clyne’s last results announcement before he departs to spend more time with his family, his relaxed tone may be understandable.

But even so, the NAB CEO is mystified by the pervasive uncertainty and the “confidence trap" the nation seems to be caught up in by comparison with, say, New Zealand. Eventually, he says, there will be a trigger for increased confidence that should boost the willingness to invest.

From an admittedly optimistic viewpoint, he suggest perhaps the budget moving from the realm of speculation to reality may help that process.

Or perhaps not . . . The rumours about the range of cuts and tax increases won’t have done much to reassure either business or the general public so far. Treasurer
Joe Hockey
will have to give a more persuasive presentation to achieve his aim of having a budget that returns to surplus over time but without harming economic growth now. Labor’s assault on “broken promises" is clearly registering.

“I am very confident the budget we have put together . . . will deliver the outcomes we are looking for," the Treasurer declared as he posed with Treasury secretary
Martin Parkinson
.

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Whether the budget will deliver what business is looking for is less clear. The biannual index of director sentiment from the Australian Institute of Company Directors, released on Thursday, showed a dramatic slide in confidence in the government after the big jump that occurred post election.

Only 30 per cent of directors believe the federal government is having a positive impact on their decision-making, down from 70 per cent six months ago. Only 30 per cent believe the government is having a positive impact on consumer confidence, down from 80 per cent. Director sentiment is slightly higher overall than at the same time last year – a low bar given business attitudes towards the Gillard government – but is still in negative territory. And the survey was before the hysteria about the debt tax took off, prior to being confirmed by senior ministers this week.

Fear of missing out

So it’s not just the banks waiting nervously to see how the budget can somehow reinforce, rather than damage, confidence levels and an improving economy. Investment bankers are seeing more deals, and a welcome return to what is known as FOMO (fear of missing out) means more boards are willing to take on more risk in acquiring assets.

But as NAB’s half-year results and others demonstrated, bank lending to business remains extremely sluggish.

A PwC report card on the record earnings from the big four emphasised the credit growth was coming largely from the mortgage market, with housing credit growth up 5.9 per cent for the year to March. In contrast, business credit growth is up only slightly – 2.6 per cent – on a year ago.

“The question will be whether it picks up or whether it will continue to bounce along the bottom," PwC’s
Hugh Harley
noted. “The growth in credit is being driven largely by existing homeowners, and investors most of all, with first home owners struggling to enter many markets."

Not that this has translated badly onto the banks’ bottom line. Bank profit results overall of $14.8 billion in underlying cash earnings in the first half of the year were up 6 per cent on the previous half, and 10 per cent on the same time last year. According to PwC, about 60 per cent of that was driven by the continuing decrease in bad debts – an improvement that can’t underpin bank profit numbers indefinitely because they are so low.

Strong profit results in future will be more dependent on willingness by business, small and large, to borrow, as well from growth in other areas like wealth management. The lure of untapped opportunities in wealth management is, of course, a reason the banks fought hard to change the rules on commission payments being allowed as part of “general" financial advice to customers.

(The idea is this will help encourage the sort of cross-selling of relatively low-fee bank superannuation and insurance products to outweigh the revenue from the banks’ financial planning networks offering more personalised – and more expensive – advice.)

But the immediate focus of the business community will be on how next week’s budget is likely to resonate through the economy. Despite Clyne’s optimism, the need to bridge the gap between government revenue and spending looks most unlikely to improve the national mood. It makes banking look almost easy.